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MOODY'S ASSIGNS A MIG 1 RATING TO THE TOWN OF NORTH READING'S (MA) $2.2 MILLION GENERAL OBLIGATION BOND ANTICIPATION NOTES, 2011 SERIES

22 Aug 2011

LONG-TERM Aa2 RATING APPLIES TO $36 MILLION IN OUTSTANDING GO DEBT

Municipality
MA

Moody's Rating

ISSUE

RATING

General Obligation Bond Anticipation Notes

MIG 1

  Sale Amount

$2,171,000

  Expected Sale Date

08/31/11

  Rating Description

General Obligation

 

Opinion

NEW YORK, Aug 22, 2011 -- Moody's Investors Service has assigned a MIG 1 rating to $2.17 million Bond Anticipation Notes 2011 Series (dated September 15, 2011 and payable September 14, 2012). Concurrently, Moody's has also affirmed the town's Aa2 rating on $34 million of outstanding parity debt.

SUMMARY RATINGS RATIONALE

The bond anticipation notes and outstanding bonds are secured by the town's limited general obligation tax pledge. The Aa2 rating reflects the town's currently narrow but stabilized financial position; sizeable tax base with above-average wealth levels and affordable debt burden. The MIG 1 rating reflects the town's demonstrated market access, as well as its solid long-term credit profile. Further diminishment of the town's financial flexibility could lead to downward pressure on the town's relative creditworthiness. Proceeds of the Series 2011 BANs will refinance $1.8 million of currently outstanding BANs maturing September 14, 2011, while $400,000 will provide new financing for various school capital projects.

STRENGTHS

-Sizeable tax base

-Above average socioeconomic wealth levels

-Strong market access

CHALLENGES

-Narrowed financial reserves

-Expenditure pressures from growing employee benefits costs

-Stagnant state aid revenues

DETAILED CREDIT DISCUSSION

DEMONSTRATED MARKET ACCESS

North Reading has demonstrated satisfactory access to the capital markets. Although the town only received two bids on its most recent note sale, dated February 3, 2011, the low number of bidders is unusual for North Reading and the small size and taxable nature of the notes were likely factors. North Reading received six bids on its prior tax-exempt note sale, dated September 15, 2010 and four bids on a note sale dated April 8, 2010. All bids were received from major regional and national financial institutions. Given this history, the town is expected to be able to refund its notes, if necessary, at their September 2012 maturity.

STABILIZING FINANCIAL POSITION; UNRESTRICTED RESERVES EXPECTED TO IMPROVE

Although North Reading's financial position has begun to stabilize, future budgets are likely to face pressure in the medium term due to increasing personnel-related expense and a continuation of limited revenue growth under the limitations of Proposition 2 ½. Following three consecutive operating surpluses, fiscal 2009 ended with a General Fund deficit that was partially driven by transfers to the Capital Stabilization Fund. Approximately $1.5 of the total $2.1 million General Fund reserve decline was a draw on the General Fund reflecting transfers to various stabilization funds. Total General Fund reserves ended fiscal 2009 with $1.2 million or a very narrow 2.4% of General Fund.

Fiscal 2010 resulted in a moderately sized $510,000 surplus driven by unbudgeted tax liens ($218,000 favorable variance) and various expenditure savings including employee benefits ($125,000 favorable variance). Total General Fund reserves ended fiscal 2010 with $1.75 million or a still narrow 3.3% of General Fund revenues while the available reserves (including General Fund Unreserved balance, the Capital Stabilization Fund and the Regular Stabilization Fund) increased to $4.3 million (8.2% of General Fund revenues). The town derives considerable financial flexibility from its Capital Stabilization Fund which ended the year with an approximate year-end balance of $1.4 million and since it is not designated for certain projects, could be transferred back to the General Fund to support operations.

The fiscal 2011 budget included an overall 1% expenditure increase over the fiscal 2010 budget along with a $720,000 reserve appropriation in the original budget. Management anticipates a modest operating surplus, increasing undesignated, unreserved fund balance to $1.6 million or 3% of revenues from $1.4 million or 2.6% of revenues in fiscal 2010. The projected operating surplus was primarily driven by favorable variances in various revenues, including meal taxes, building permits and motor vehicle taxes. The Capital Stabilization Fund reportedly ended at $1.3 million in fiscal 2011, $902,000 of which will be utilized for debt service in 2012. It is expected that a portion of the estimated $750,000 fiscal 2012 Free Cash will be used to partially replenish the fund. Although the town's stabilization funds could provide limited relief in the medium term, balancing future budgets while maintaining the current level of services is expected to present a challenge as voters have previously denied operating overrides of Proposition 2 ½. In addition, the town could face additional financial pressure as both town and school department capital needs are evaluated relative to Proposition 2 ½ and the town has limited ability to accommodate significant debt service increases without operating budget reductions. Future rating reviews will incorporate the town's ability to maintain structural balance and an overall fiscal profile that is consistent with comparably-rated communities.

TAX BASE GROWTH SLOWING AFTER COMPLETION OF MAJOR REDEVELOPMENT PROJECTS

The town's $2.7 billion equalized value is expected to remain stable in the medium term. Although limited water capacity and the lack of a town-wide sewer system could limit future development, North Reading maintains a good supply of available land and strong regional demand for new residential and commercial development. Located approximately 16 miles north of Boston (G.O. rated Aaa/stable outlook), North Reading has seen recent contractions in equalized valuation (EQV). Due primarily to new residential construction and market value appreciation, growth had averaged a healthy 12.6% annually from 2001-2007. However, the absence of equalized value growth in 2010 and a decrease of 3.4% in 2011 caused average annual growth to drop to 2.7% for the six-year period 2005-2011. Town officials report that growth is expected to continue as several new developments are proposed or underway following a recently completed redevelopment of an 86-acre parcel, formerly the site of a state hospital, for mixed-use including residential and commercial uses. Additionally, Teradyne, the town's largest taxpayer and employer recently closed its headquarters in the City of Boston, increasing 1,000 employees to the town, requiring additions to the current facility. North Reading's income levels exceed the national (PCI 143% of US) and approximate the state medians (PCI 119% of State),and the strong $184,194 equalized value per capita which reflects healthy tax base diversity and quality.

AFFORDABLE DEBT BURDEN WITH SIGNIFICANT FUTURE BORROWING PLANS

North Reading's average 1.2% overall debt burden is currently manageable given satisfactory amortization of principal (77.4% within 10 years) although future borrowing plans, if not supported by successful debt exclusion votes, could place significant pressure on the overall budget. Debt service claimed a manageable 8% of general fund expenditures in fiscal 2010. Favorably, the town established a capital stabilization fund which reportedly held $1.8 million at year-end fiscal 2010, which is restricted for future debt service over the next 20 years, relieving capital expenditure pressure on the town's limited property tax levy. Future projects include $40 million to replace the town's high school and other school improvements over the next two years, assuming an estimated 50% state building approval, which would greatly reduce the total $80 million project cost. North Reading has no exposure to variable or auction rate debt or swap agreements.

WHAT COULD MOVE THE RATING UP

-Significant and sustained surpluses in financial operations, increasing reserve levels

WHAT COULD MOVE THE RATING DOWN

-Inability to obtain structural balance resulting in further draw-downs of already narrowed fund balances

-Significant increases in debt levels

-Further reductions of state aid that materially impact the town's budget

KEY STATISTICS

2010 Population (US Census): 14,892 (+7.2% since 2000)

2010 Equalized valuation: $2.7 billion

Equalized value per capita: $184,194

Average annual growth, equalized value (2005-2011): 2.7%

1999 Median family income: $86,341 (140% of MA, 172.5% of US)

1999 Per capita income: $30,902 (119.1% of MA, 143.2% of US)

Overall debt burden: 1.2%

Amortization of principal (10 years): 77.4%

Fiscal 2010 General Fund balance: $1.7 million (3.3% of General Fund revenues)

Fiscal 2010 Available Reserve $2.7 million (5.1% of General Fund revenues)

Long-term general obligation debt outstanding: $34 million

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Vito Galluccio
Analyst
Public Finance Group
Moody's Investors Service

Susan Kendall
Backup Analyst
Public Finance Group
Moody's Investors Service

Geordie Thompson
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
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MOODY'S ASSIGNS A MIG 1 RATING TO THE TOWN OF NORTH READING'S (MA) $2.2 MILLION GENERAL OBLIGATION BOND ANTICIPATION NOTES, 2011 SERIES
No Related Data.
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